Succession planning … why bother?
If you enjoy what you do and plan on continuing to work well into your golden years, is succession planning really necessary?

June 21, 2012by Gerald A. Townsend, CPA/PFS/ABV

When I reached 40, current and prospective clients occasionally asked, “What happens if you die? Are my accounts affected? Who will be helping me?” My first thought was that I must be looking pretty bad and that I should have gotten more sleep the night before. Of course, it was a legitimate question, so I stumbled through my response.

This year I turned 60 and clients’ questions are more like this: “How much longer do you plan on working? Who will be managing my money and helping me with my financial planning when you retire?”

My reply to today’s question is that I enjoy my work and have no plans to retire anytime soon. In fact, I am more passionate and intrigued by this profession than when I first entered it more than 30 years ago. At the same time, I know that I could die tomorrow or be forced to stop working by an unforeseen health problem, so I also reply to that question by letting clients know that although my firm is small, it does have younger associates who are being groomed to take on my responsibilities.

It has been well publicized that the average principal of a financial or wealth management firm has gray hair and therefore needs to have a succession plan in place. There are a host of consultants and seminars available to assist CPA practitioners in developing and implementing succession plans, including wrestling with the tough and thorny questions of valuation, deal structure, timing, tax considerations, and more.

However, many established advisers have no desire to leave their chosen profession anytime soon. Their business may be running smoothly, and in addition to a good income, it may provide them with a great lifestyle and something they can see themselves doing indefinitely.

Therefore, for those of us who really enjoy our work, our clients, and the intellectual stimulation, not to mention the challenge of grappling with all the macro and micro issues of this profession, focusing time and energy on a topic of how to exit our business can not only seem distracting, but can make us feel empty and lost.

As advisers, we work with many clients busily funding and planning for retirement. For some, retirement is a wonderful phase of life—enjoying family, traveling, pursuing other interests, and giving back to their community. However, for others, retirement is a tough transition, not just because of a decline in income, but because they liked their work and miss it or because their sense of identity and self-worth depended on their work or title.

As an adviser, if your plan is to continue working well into your 60s or 70s or longer, why bother with succession planning? Two reasons immediately come to mind:

It is the responsible thing to do for your family and your clients. You’ve worked hard to build a practice and there is value in what you’ve accomplished – and it may be your most valuable asset. In addition, you care about your clients, both personally and professionally. One way or another, you will one day exit your business and your clients want and deserve to understand what your plan for that eventuality is and how they will be impacted.

You risk losing both your clients and employees without a sensible succession plan that hasn’t been clearly communicated. If your plan is to “die with your boots on,” you may be able to gradually reduce your client workload as you age, but clients often have their own ideas. I’ve watched clients leaving older advisers, not just because of the adviser’s age, but as a result of the adviser failing to clearly convey any type of succession plan to their clients.

Why bother with succession planning? Because you must.

Fortunately, help is available. Even if you are fully capable of developing a plan yourself, that is probably not wise. One of the key benefits advisers provide their clients is that they are impartial and objective and can consider each client’s financial situation from a viewpoint that is impossible for the client to duplicate. In this case you are the client and you need someone else to provide that objective analysis.

However, I would also caution advisers to remember that whatever succession plan they eventually develop, it is their plan and they need to fully understand their own plan, its structure, and the pros and cons of it. This point became very clear to me recently when I testified in a dispute between two financial advisers. The valuation of their deal involved both a fixed amount and a variable component. The variable component was based on the amount of revenue the buyer would receive during a certain “window period” after the date of sale. However, this structure actually provided a disincentive for the buyer to really work hard during this short window period, because a dollar of lost revenue to the buyer during the window translated into several dollars of lower valuation of the variable component of the buyer’s purchase price. A good result for the buyer, but not so good for the seller. Obviously, the interests of the buyer and seller were not aligned.